In November, Shake Shack's (NYSE:SHAK) CEO Randy Garutti announced the expansion of the four-day workweek for its managers. The four-day workweek program will be offered at a third of the burger chain's restaurants. Managers are still expected to cover 40 hours during the week, but over four days instead of the typical five-day workweek.
Let's take a look at whether Shake Shack's four-day workweek might be good for business.
Looking for a four-day advantage
The burger chain is making the workweek change in an effort to attract and retain employees. Restaurant talent is subject to high turnover due to stagnant compensation. Managers are often forced to seek employment elsewhere if their compensation languishes. Any angle that would attract and retain employees without adding to labor costs would be an advantage.
To that end, the four-day workweek had early promising results. Garutti noted the positive feedback from its current employees under the four-day workweek program and how the program has attracted people to apply at the burger chain. He added, "We're hearing things like, wow, (the four-day workweek) is so powerful...I don't need to get child care for a fifth day. Wow, this is amazing. We're hearing things like, you know, I saw that and that caused me to apply to Shake Shack."
Labor costs are hard to shake
While many restaurants are facing labor cost challenges amid legislative minimum wage hikes, Shake Shack has been willing to shoulder higher labor costs to attract and keep its employees. It even advocated for higher minimum wages laws and voluntarily added to its employees wages ahead of legislated wage increases, anticipating that the higher compensation would result in better sales.
However, Shake Shack is finding that labor costs are cutting into the bottom line and have not translated in better sales performance. Its third quarter reported a lower guidance for full year same store sales of 1.5%, down from 2%. A reason for the lowered guidance was its rising operating expense, which includes labor. Labor and related costs were 27.3% of its sales, up 0.3% from the same quarter last year. CFO Tara Comonte noted that this expense increase has been slowing over time. Even with the slowing growth in labor costs, Garutti projected that Shake Shack's labor costs will rise to the mid-single digits in the upcoming year.
Labor is and continues to be a large segment of Shake Shack's costs. Its management doesn't seem to be afraid of labor costs, instead increasing wages over the year. Since cutting labor costs don't seem to be an option to increase its bottom line, Shake Shack needs to look at productivity gains to improve sales. While management has remarked about the recruiting and retention advantages of the four-day workweek, it may actually be with an eye toward improving employee productivity.
A window into Microsoft's workweek experiment
Although the burger chain has not disclosed its financial metrics covering the shorter workweek, other companies have experimented with similar programs with profound results. This year, Microsoft's (NASDAQ:MSFT) Japan office piloted a program that gave its staff every August Friday off. Though the workweek was reduced by a day, Microsoft found that productivity, as measured by sales-per-employee, had increased by nearly 40%. Employees were also fond of the program -- 92% of employees were happy with the shorter work week.
While there is not much crossover between a burger chain and a software company, Shake Shack is hoping that its four-day workweek will mirror the productivity gains and the employee satisfaction that Microsoft's Japan offices had. Shake Shack has accepted higher labor costs as a hit on its short-term business but is hoping it will attract and retain happier, more efficient employees in the long run. Investors should bear in mind, however, that this business decision will likely continue to cut into its guidance and profitability, at least in the short-term.
Could four-day productivity top higher labor costs?
It remains to be seen how effective the four-day workweek will be for Shake Shack. It has already shown promise as a recruiting and retention tool, even in this limited roll out. Given management's reluctance to cut labor costs, Shake Shake is looking for ways to improve employee productivity to boost its sales. Shake Shack is hoping that a four-day workweek will advance productivity, like it did for Microsoft. I believe that it will, since the novel workweek schedule will likely motivate employees at work knowing they get another day off, an option that doesn't exist at most other employers. If the program results in productivity gains without adding to labor costs, Shake Shack will likely return to growing its profitability and pave the way toward setting a new industry standard.